Racing to the bottom

How much was the last app you bought on your smartphone?  It’s very likely that the answer to that question is less than a pound, no matter how complex or detailed that app was.  When Apple launched the App Store in 2008, the average price of apps was significantly higher, with games such as Super Monkey Ball selling for £5.99 and Crash Bandicoot Nitro Kart at $12.99.  Over time, the huge competition has led to games dropping prices to 69p, or even free, with new revenue streams being established through advertising or additional purchases.  Along with this fall in pricing, many firms have found that it’s not profitable to spend time developing complex games and applications, leading to a proliferation of match-three and simple physics puzzlers.

Competing away all profits is not limited to application development; in standard microeconomic theory, in perfect competition all companies will reduce prices until they are making no excess profit, with the only return being that which is needed to retain a viable business.  The App Store has gone beyond this, with companies needing to seek out alternative revenue streams in order to survive.

Earlier this year, Google announced that it was closing its Google Reader service.  Google tends to not charge consumers for its services, but instead relies on revenues from advertising placed alongside the services.  Google Reader was increasingly used with third-party applications which meant that this revenue stream was unavailable.  In its place, many alternatives are available – but these are almost all free of charge, as this is what consumers have come to expect.  One of the most popular RSS readers, Feedly, ran a survey to find out whether people would be prepared to pay for the standard features, and found that in order to charge for the services, there would need to be significant additional benefits – explaining the launch of Feedly Pro.

We frequently see prices being pushed down due to competition – but consumers are reluctant to let them rise again.

Competition doesn’t just impact consumers and pricing.  International finance has traditionally clustered in key cities around the world, such as London, New York and Tokyo.  However, over time the stranglehold these cities hold over finance has diminished, and there are fears this trend may accelerate in the future.  This is not purely caused by the desire for local funding; instead, governments looking to increase the activity in the financial sector in their countries are reducing regulation and making the cost of operating in their cities lower.  Financial markets are more sticky than consumers, but the race to the bottom of regulation and compliance costs can only increase the numbers of transactions based elsewhere.

However, as app developers have found, attracting custom by pricing yourself out of the market is not a good long-term strategy.  New financial markets may find that they are left catering for small risky homogeneous firms – the match-three games of the business world.

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